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Re: Yes Virginia...It's a Bubble...
Warren Pollock on the hollowing out economy.
Warren Pollock on the hollowing out economy.
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Re: Yes Virginia...It's a Bubble...
Is Stock Investing for Suckers?
By Pam Martens and Russ Martens: September 30, 2015
On March 10, 2000 the Nasdaq stock market, which is supposed to hold the technology and startup companies that will keep America globally competitive in the future, closed at a high of 5,048.62. Yesterday, more than 15 years later, it closed at 4,517.32, a decline of 10.5 percent from its level of March 2000.
Nasdaq Index Chart Since 1988
To fully grasp the unprecedented nature of the Nasdaq bubble of 2000, one has to look at where the three big stocks are today that made that 5,000 mark possible 15 years ago. Just three stocks, Microsoft, Cisco, and Intel, were valued at a market cap of $1.89 trillion in 2000. As of yesterday’s close, those three stocks had a combined market cap of $616.137 billion – a shrinkage of 67 percent after more than 15 years.
Much of the hype, as well as the money, that surrounded Microsoft, Cisco and Intel in early 2000, has moved to Apple today, which also trades on the Nasdaq. As of yesterday’s close, Apple commands a market value of $621.9 billion.
Back on March 19, 2000 the Silicon Valley Business Journal reported that one analyst was predicting Cisco was headed toward a market cap of $1 trillion. (Its market cap at yesterday’s close was $129.7 billion, down 80 percent from 2000.)
The article noted that “Thirty-seven investment banks recommend either a ‘buy’ or a ‘strong buy.’ None recommend a ‘sell’ or even a ‘hold.’ ”
On March 23 of this year, an analyst at Cantor Fitzgerald made the same frothy market prediction that Apple would hit a $1 trillion market cap. It’s lost $122 billion in market cap since that call.
The Federal government has two decades of evidence that the integrity of Nasdaq as a stock market has been repeatedly compromised. Yet it does nothing material to rein in the abuses.
The excesses leading up to the crash of 2000-2002 and the crash of 2008-2009 resulted from a highly orchestrated wealth transfer machine on Wall Street that was allowed to operate with impunity from the Federal regulators. As we reported in 2008:
[Regarding the Nasdaq boom of the late 90s] “First, Wall Street firms issued knowingly false research reports to trumpet the growth prospects for the company and stock price; second, they lined up big institutional clients who were instructed how and when to buy at escalating prices to make the stock price skyrocket (laddering); third, the firms instructed the hundreds of thousands of stockbrokers serving the mom-and-pop market to advise their clients to sit still as the stock price flew to the moon or else the broker would have his commissions taken away (penalty bid). While the little folks’ money served as a prop under prices, the wealthy elite on Wall Street and corporate insiders were allowed to sell at the top of the market (pump-and-dump wealth transfer).
“Why did people buy into this mania for brand new, untested companies when there is a basic caveat that most people in this country know, i.e., the majority of all new businesses fail? Common sense failed and mania prevailed because of massive hype pumped by big media, big public relations, and shielded from regulation by big law firms, all eager to collect their share of Wall Street’s rigged cash cow.
[Regarding the 2008 market]“The current housing bubble bust is just a freshly minted version of Wall Street’s real estate limited partnership frauds of the ‘80s, but on a grander scale. In the 1980s version, the firms packaged real estate into limited partnerships and peddled it as secure investments to moms and pops. The major underpinning of this wealth transfer mechanism was that regulators turned a blind eye to the fact that the investments were listed at the original face amount on the clients’ brokerage statements long after they had lost most of their value.
“Today’s real estate related securities (CDOs and SIVs) that are blowing up around the globe are simply the above scheme with more billable hours for corporate law firms.
“Wall Street created an artificial demand for housing (a bubble) by soliciting high interest rate mortgages (subprime) because they could be bundled and quickly resold for big fees to yield-hungry hedge funds and institutions. A major underpinning of this scheme was that Wall Street secured an artificial rating of AAA from rating agencies that were paid by Wall Street to provide the rating. When demand from institutions was saturated, Wall Street kept the scheme going by hiding the debt off its balance sheets and stuffed this long-term product into mom-and-pop money markets, notwithstanding that money markets are required by law to hold only short-term investments. To further perpetuate the bubble as long as possible, Wall Street prevented pricing transparency by keeping the trading off regulated exchanges and used unregulated over-the-counter contracts instead. (All of this required lots of lobbyist hours in Washington.)”
S&P Returns, March 2000 to Present With Dividends Reinvested and Adjusted for Inflation
You are likely thinking that Nasdaq doesn’t reflect the performance of the broader market. You will likely be shocked to see the performance of the Standard and Poor’s 500 index of stocks starting from March 2000 to September 2015, courtesy of this handy online calculator. Even with dividends reinvested, the S&P has delivered a paltry 1.715 percent annualized return since March 2000 on an inflation adjusted basis. And that’s before paying taxes on dividends.
Even if you are invested in diversified, actively managed stock mutual funds, over a working lifetime you are likely to lose two-thirds of your money because of the management fees, according to a PBS Frontline report.
This would also be a good time to remember that stock market performance following epic financial crashes that ravage the economy can be hazardous to your wealth. Following the 1929 crash, the stock market did not set a new high until 1954 – 25 years later.
Yesterday, the Securities and Exchange Commission announced that it will hold a hearingon October 27, open to the public, on the stock market’s structure. The SEC has had 15 years since the revelations of the rigged market of 2000 and 7 years since the worst market collapse since the Great Depression to actively engage in reining in the abuses. Yesterday’s announcement was decidedly too little too late.
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Re: Yes Virginia...It's a Bubble...
Japanese Shipping Company Files for Bankruptcy Protection Over Glencore Fallout
Updated on
The Chinese economic slowdown that’s caused a rout in mining giant Glencore Plc’s stock price claimed a victim in Japan’s shipping industry, sparking a jump in thedefault risk for other competitors and trading companies reliant on the commodities and energy business.
Daiichi Chuo KK filed for bankruptcy protection in Tokyo on Tuesday with 120 billion yen ($1 billion) in liabilities, in the biggest failure by a publicly-traded Japanese company this year. The cost to insure shipper Mitsui OSK Lines Ltd.’s debt against nonpayment surged 43 basis points last month and touched 156, the highest since October 2013, while trading house Mitsui & Co.’s credit-default swaps climbed to the most since August 2012, CMA data show. The Markit iTraxx Japan CDS index rose 19 basis points in September.
China is Japan’s biggest trading partner and its deceleration is rippling through Prime Minister Shinzo Abe’s economy, which probably slipped back into recession after unexpectedly weak industrial production in August, according to a report by JPMorgan Chase & Co. on Wednesday. Daiichi Chuo filed for bankruptcy protection this week after four consecutive years of losses amid plunging freight rates and too many ships built to supply commodities to Asia’s biggest economy.
“If you look at the big picture, China’s weakness is the reason why Daiichi Chuo is heading for default,” said Mana Nakazora, the chief credit analyst in Tokyo at BNP Paribas SA.
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Re: Yes Virginia...It's a Bubble...
It's amusing to see that every commodity company in every country is going to go bankrupt because of "China's weakness", except for Chinese companies, at least for now.
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Re: Yes Virginia...It's a Bubble...
China will have no option but to continue to devalue the yuan unless the Fed introduces QE4. This will give them a brief respite but will not last. Painfully the market thinks that QE was about inflating commodity prices and when QE4 demonstrates that it is not, China will turn down again.Originally posted by touchring View PostIt's amusing to see that every commodity company in every country is going to go bankrupt because of "China's weakness", except for Chinese companies, at least for now.
That is not going to last: http://www.zerohedge.com/news/2015-1...est-their-debt
Earlier today, Macquarie released a must-read report titled "Further deterioration in China’s corporate debt coverage", in which the Australian bank looks at the Chinese corporate debt bubble (a topic familiar to our readers since 2012) however not in terms of net leverage, or debt/free cash flow, but bottom-up, in terms of corporate interest coverage, or rather the inverse: the ratio of interest expense to operating profit. With good reason, Macquarie focuses on the number of companies with "uncovered debt", or those which can't even cover a full year of interest expense with profit.
The report's centerprice chart is impressive. It looks at the bond prospectuses of 780 companies and finds that there is about CNY5 trillion in total debt, mostly spread among Mining, Smelting & Material and Infrastructure companies, which belongs to companies that have a Interest/EBIT ratio > 100%, or as western credit analysts would write it, have an EBIT/Interest < 1.0x.
As Macquarie notes, looking at the entire universe of CNY22 trillion in corporate debt, the "percentage of EBIT-uncovered debt went up from 19.9% in 2013 to 23.6% last year, and the percentage of EBITDA-uncovered debt up from 5.3% to 7%. Therefore, there has been a further deterioration in financial soundness among our sample."
[IMG]file:///C:/Users/Andrew/AppData/Local/Temp/msohtmlclip1/01/clip_image001.jpg[/IMG]
To be sure, both the size (the gargantuan CNY22 trillion) and the deteriorating quality (the surge in "uncovered debt" companies) of cash flows, was generally known.
What wasn't known were the specifics of just how severe this bubble deterioration was for the most critical for China, in the current deflationary bust, commodity sector.
We now know, and the answer is truly terrifying.
Macquarie lays it out in just three charts.
First, it shows the "debt-coverage" curve for commodity companies as of 2007. One will note that not only is there virtually no commodity sector debt to discuss, at not even CNY1 trillion in debt, but virtually every company could comfortably cover their interest expense with existing cash flow: only 4 companies - all in the cement sector - had "uncovered debt" 8 years ago.
[IMG]file:///C:/Users/Andrew/AppData/Local/Temp/msohtmlclip1/01/clip_image002.jpg[/IMG]
Fast forward to 2013 when things get bad, as about a third of all corporations are now unable to cover their annual interest expense, even as the total addressable corporate debt has soared to CNY4 trillion for just the commodity sector.
[IMG]file:///C:/Users/Andrew/AppData/Local/Temp/msohtmlclip1/01/clip_image003.jpg[/IMG]
And then in 2014, everything just falls apart. Quote Macquarie, "more than half of the cumulative debt in this sector was EBIT-uncovered in 2014, and all sub-sectors have their share in the uncovered part, particularly for base metals (the big gray bar on the right stands for Chalco), coal, and steel."
Compared with the situation in 2013, while almost all sub-sectors did worse in 2014, but things appear to have worsened faster for coal companies as more red bars have moved beyond the 100% critical level for EBIT-coverage.
It means that last year about CNY2 trillion in debt was in danger of imminent default.
[IMG]file:///C:/Users/Andrew/AppData/Local/Temp/msohtmlclip1/01/clip_image004.jpg[/IMG]
The situation since than has dramatically deteriorated.
So are we now? Macquarie again: "Given the slumps in metal and coal prices so far this year, it’s quite likely the curve will have deteriorated further for commodity firms this year, with total debt getting better in the meantime."
In other words, it is safe to assume that up to two-third of Chinese commodity companies are now at imminent danger of default, as they can't even generate the cash to pay down the interest on their debt, let alone fund repayments.
We fully expect this to be the source of the next market freakout: when the punditry turns its attention away from macro China, which has more than enough problems to begin with, and starts to focus on the cash flow devastation in China at the micro, or corporate, level.Comment
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Re: Yes Virginia...It's a Bubble...
today's u.s. labor numbers don't make china's export prospects look any better.
so what does a bubble with chinese characteristics look like when it pops? we have remarked at times in the past on the potential advantages of a command economy in such situations. where can/will they apply stimulus and in what form? more ghost cities? more infrastructure? if they're truly serious about wanting to transition to a more consumption-based economy they should give everyone health insurance and a pension - those moves would promote spending. that last suggestion doesn't seem very likely, however.
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Re: Yes Virginia...It's a Bubble...
I am hearing that bankrupt coal companies who don't actually have to go bankrupt because they are petitioning the government for assistant are looking to "invest" in property and technology.Comment
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Re: Yes Virginia...It's a Bubble...
- it is difficult to displace entrenched interests; and in China the long institutionalized corruption ensures entrenched interests rooted deeper than a dandelion.Originally posted by jk View Post
- Chinese dandelions at risk of being "Round-Upped" will likely continue to try to move their capital and themselves out ahead of the arrival of Xi's herbicide crews - capital flows will continue to be an important China indicator.
- there will never be an official "popped bubble" in China; they have no need to visibly bail out these companies, including the banks, because the government already owns almost all of them - they can do the bailouts quietly below the radar if necessary.
- the reported sales from North American and European company China subsidiaries might be one of the better indicators of how well the shift to a "consumer economy" in China is progressing - VW, BMW, Buick vehicle sales, consumer staples sold by companies such as Unilever and similar.
- As the tone of most of my posts on this thread imply I have never been a believer in any sort of superior Chinese economic system nor optimistic about the ability of the Chinese authorities to deal with the inevitable bursting of the most gargantuan financial bubble in human history - and now that it appears the bust may have finally arrived, the initiatives and pronouncements from Chinese authorities to date don't inspire confidence.Comment
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Re: Yes Virginia...It's a Bubble...
Originally posted by jk View Post
From what I've heard from people from China, they have some sort of municipal pension scheme although it doesn't pay that much, but should cover food and utlities. Public healthcare services are heavily subsidized, but you need to pay for medicine. The medical standards in major cities hospital is not inferior to developed countries, especially in the area of oncology and rheumatology as they combine both Western medicine and TCM herbs.Comment
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Re: Yes Virginia...It's a Bubble...
Originally posted by jk View Post
From what I've heard from people from China, they have some sort of municipal pension scheme although it doesn't pay that much, but should cover food and utlities. Civil servants get a lot more, and maybe even a heavily subsidized government apartment if they worked for a number of years.
Public healthcare services are heavily subsidized, but you need to pay for medicine. The medical standards in major cities hospital is not inferior to developed countries, especially in the area of oncology and rheumatology as they combine both Western medicine and TCM herbs.Comment
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Re: Yes Virginia...It's a Bubble...
Way Down ... Under
STOCKMAN'S CORNER
Australia—–The Bubble ‘Down Under’ Is About To Burst
Thanks to a variety of idiosyncratic political crises and country-specific stumbling blocks, Brazil, Turkey, Malaysia, and to a lesser extent Russia, have received the lion’s share of coverage when it comes to assessing the EM damage wrought by the comically bad combination of slumping commodities prices, depressed Chinese demand, slowing global trade, and a “surprise” yuan devaluation.
Put simply, the intractable political stalemate in Brazil, the civil war in Turkey, the 1MDB scandal in Malaysia (and the fact that the country was at the center of the 1998 meltdown), and the hit Russia has taken from depressed crude prices mean that if you want to pen a story about emerging market chaos, those four countries have plenty to offer in terms of going beyond the generic “falling commodities + a decelerating China = bad news for EM” narrative.
But just because other vulnerable countries aren’t beset with ethnic violence and/or street protests doesn’t mean they too aren’t facing crises due to falling commodity prices and the slowdown of the Chinese growth machine.
One such country is Australia, which in some respects is an emerging market dressed up like a developed economy, and which of course has suffered mightily from the commodities carnage and China’s transition away from an investment-led growth model.
Out with a fresh look at the risks facing Australia is RBS’ Alberto Gallo. Notable excerpts are presented below.
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From RBS
Australia has become a commodity focused economy, with an increasing exposure to China. For the past decades, Australia has been buoyed by the rapid Chinese expansion, which outpaced the rest of the world. Australia benefited from China’s strong demand for commodities given its investment-led growth model. China is Australia’s top export destination and 59% of those exports are in iron-ore. But as China struggles to manage its ongoing credit crunch and continues its shift to consumption-led growth Australia’s economy is likely to be hurt by lower demand for commodities.
The economy is slowing due to external headwinds. Last quarter, Australian GDP grew at just 0.2% QoQ, its lowest level in the last three years (and below the market consensus of 0.4%). According to the Australian Bureau of Statistics (ABS) the growth rate was driven by higher domestic demand, while lower exports and a declining mining industry continue to present headwinds. Mining’s gross value-added to GDP fell by – 0.3% QoQ in Q2.Despite Reserve Bank of Australia (RBA) governor, Glenn Stevens, citing lower growth as potentially a “feature of the post financial crisis world” meaning that “potential growth is a bit lower”, Australia’s slowing economy is more than just a victim of the post financial crisis world, in our view.Rising unemployment coupled with soaring house prices and vulnerabilities in the commodity and construction sectors are all cause for concern.
Unemployment is rising, and could increase further, given the high proportion of employment in the vulnerable mining and construction sectors. Unemployment is at 6.2%, just shy of the ten year high of 6.3%.Although the number itself is not worryingly high, unemployment has been rising for the last three years, and is likely to continue in our view. Mining and commodity sectors employ 4.5% of the workforce. With lower demand for commodities from China, unemployment in these sectors could rise. Also, unemployment may rise in the construction sector (8.9% of workforce) given vulnerabilities in the housing market, as we explain below.
There are domestic headwinds, too. The housing market is vulnerable, with overvalued properties and over-levered households. House prices in Australia have risen by 22% in the last three years (according to the Australian Residential Property Price Index), with property prices in Sydney overtaking those in London. House prices have risen faster than both disposable income and inflation in recent years, with the gap between growth in house prices and household income closing by over 40% in the last three years.
If unemployment continues to rise, due to losses in mining and construction, the house price bubble could pop. Rising unemployment in the mining industry, due to its exposure to a slowing China, will create risks in the property market; house prices are likely to fall as the newly unemployed could be forced to sell.
The RBA has less dry powder now. The central bank has cut rates twice this year, from 2.25% in March to 2% now. As the domestic economy slows, accommodative policy is needed to encourage investment, particularly in non-mining sectors, to boost growth and create jobs. However, with rates already at 2%, there is much less headroom for monetary easing to offset a downturn in Australia.
The worst is yet to come, in our view.
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So summarizing in the simplest possible terms: slowing demand for commodities leads to rising unemployment which means trouble for overleveraged households and that’s bad news for the country’s housing bubble. Meanwhile, the RBA is running out of ammo.
If ever there were a bearish narrative that’s easy to grasp, surely that’s it.
Of course thanks to the ascension of Malcolm Turnbull, Australia may have a secret weapon…
Turnbull was Chairman of Goldman Sachs Australia from 1997-2001.
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Re: Yes Virginia...It's a Bubble...
Originally posted by stockman
malaysia was not the center of the 1998 em currency crisis. in fact it was relatively unscathed because - in defiance of its would-be masters at the imf et al - it instituted capital controls.
Did the Malaysian Capital Controls Work?
Ethan Kaplan, Dani Rodrik
NBER Working Paper No. 8142Malaysia recovered from the Asian financial crisis swiftly after the imposition of capital controls in September 1998. The fact that Korea and Thailand recovered in parallel has been interpreted as suggesting that capital controls did not play a significant role in facilitating Malaysia's rebound. However, the financial crisis was deepening in Malaysia in the summer of 1998, while it had significantly eased up in Korea and Thailand. We employ a time-shifted differences-in- differences technique to exploit the differences in the timing of the crises. Compared to IMF programs, we find that the Malaysian policies produced faster economic recovery, smaller declines in employment and real wages, and more rapid turnaround in the stock market.
Issued in February 2001
NBER Program(s): IFM
http://www.nber.org/papers/w8142
makes me wonder what else stockman is distorting or making up as he goes along. of course his most famous confabulation was that well known beauty, "Rosy Scenario," when he was head of omb under reagan. his overview of australia's position seems reasonable, but i don't want to fact check every sentence and clause. i don't see why anyone should trust himLast edited by jk; October 03, 2015, 07:41 PM.Comment
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Re: Yes Virginia...It's a Bubble...
This is because the then Malaysian prime minister was very anti-IMF and anti-bankers which was very unusual in those days.
On hindsight, he was right after all. There is no free lunch. ;)
Originally posted by jk View PostComment
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Re: Yes Virginia...It's a Bubble...
jk, I can't speak to the world outside of NA but real estate has been a good investment over the last several years. After the collapse in the US, real estate bottomed in 2010-2012 depending on location. Since then, it's moved up. But even without appreciation, rental real estate throws off 3-4% tax deferred and tax converted cash flow depending on when you purchased. It also adds more standard taxable income. I understand this isn't an investment for everyone but it does return a reasonable yield.Originally posted by jk View PostComment
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